A NEW LOOK AT AN OLD PROBLEM – WAGE INEQUALITY (PART VI)

May 20, 2014

A NEW LOOK AT AN OLD PROBLEM – WAGE INEQUALITY (PART VII)
Unsurprisingly, Piketty’s opus is not everyone’s cup of tea. His fundamental findings (based on research and not ideology) are not approved by some from the ideologue camp, notably new Marxists, who argue that Piketty’s assumptions about the future are unfounded. My response to that is that his predictions for the future are based on three hundred years of research, and while there are many slips twixt the cup and the lip, I will take the lessons of history and research over the ideology of either right or left wing guesswork. Piketty’s effort favors neither right nor left; it is rather a work of pragmatism and reality with no preconceived conclusions.
Piketty admits there are gaps in the research he conducted to come up with his basic formula and ultimate conclusion (which I will discuss later). Plainly the Nazi and Stalinist eras (along with East India Tea and Standard Oil and other trusts) yielded suspect numbers. Piketty refers to such gaps and discusses the means he used to make them useful for his purposes in writing his epic work. Some numbers are better than no numbers; how one treats such gaps and the weight he/she assigns them or parts of them is the best we can do at this late date. I find his treatment objective and fair.
It is not just new Marxists on the left who are unhappy with Piketty’s unassailable logic and conclusions. The right is unhappy as well (and they should as defenders of capitalism be unhappy with the demonstrated truth in his effort since he deals with objective facts and not corporate fables). Thus Ryan Decker argues that the book is more about accounting than economics. That seems a particularly weak rejoinder to me because accounting is a necessary prelude to establish the research base from which one can draw conclusions based on reality and not ideology (as both left and right have so successfully sold to America over the past some 150 years – the Gilded Age through today). Indeed I think Decker’s putdown is a compliment rather than a criticism of Piketty’s work; it is the solid numbers Piketty has so laboriously pulled out of the past three centuries that undergird his conclusions of the global economic future. So just what were the numbers and what are his conclusions in this last part of my essay?
First some background – Piketty and Emmanuel Saez first studied American income tax data to show how highly concentrated income was in the top 1, 0.1, or even 0.01 percent. Their research on this income inequality is at the heart of today’s debate about sharing such new wealth fairly as between capitalists and their workers and is the debate in which I have extensively written. Piketty’s book moves the debate from income inequality to wealth inequality. (The two, of course, are joined at the hip, obviously, since the more one side takes, the less for the other.)
Piketty correctly defines capital as wealth, but wealth is much more unequally distributed than income where 5 percent of households own a majority of the wealth while the bottom 40 percent have negative wealth due to debts. I am not among those who believes that it is too simplistic to divide a society into those who own things and those who work for a living; I think the comparison apt. With tax and bankruptcy codes written to favor the already wealthy, it is plain that their wealth will expand. Thus “taxable income” tells us little about wealth already accumulated.
The expansion of wealth in isolated context is not necessarily bad if accompanied by economic growth at the same rate, as Piketty shows with his now celebrated formula r>g, which is a simple construct. His principal finding proceeds from his research showing that r, the private rate of return on capital, is greater for long periods of time than the rate of growth and output, or g. When this occurs over long periods of time, the rich continue to get richer and the poor (from which such additional wealth is secured) get poorer. He dates the anomalies of periods of time in which there were shocks to the system (WW I and II and the Great Depression until about 1980) in which r and g were more or less the same because of the devastation of the wealth of Europe and Japan and high employment and a sharing of the new wealth with labor (I date America’s r>g’s rejection from the New Deal until circa 1974).
Piketty’s research (irrespective of what economic policies are adopted!) shows that capital growth has been and will continue to be 4 to 5 percent while economic growth for the foreseeable future will likely average 1 to 1.5 percent per annum. He writes that: “With an average return on capital of 4-5 percent, it is therefore likely that r>g will again become the norm in the twenty-first century, as it had been throughout history until the eve of World War I. In the twentieth century, it took two world wars to wipe away the past and significantly reduce the return on capital, thereby creating the illusion that the fundamental structural contradiction of capitalism (r>g) had been overcome.” He eschews heavy taxation of capital as it would kill the motor of accumulation (greed – my word for it) and thus further reduce the growth rate; he rather favors a progressive annual tax on capital (which, you will recall, he equates with wealth). He is of the view that such a progressive tax on capital could “avoid an endless inegalitarian spital while preserving competition and incentives for new instances of private accumulation.”
He correctly cautions that such a progressive taxation on capital would require a high level of international cooperation, otherwise, those with huge fortunes subject to such a tax would simply (as now) send their money to Swiss banks and other tax-dodging venues. All international states would have to be privy to such agreements in order to have effective enforcement of such tax statutes by individual states.
Piketty is of the view (and I agree) that the historic ratio r>g is back with us since the devastation of capital in WW I, WW II and the Great Depression, and that we must do something to impede its continuation because, unless we do, our democracy may well be lost – lost to a formula, a formula that can be altered but not if we do nothing, because, as Stiketty puts it: “Once constituted, capital reproduces itself faster than output increases. The past devours the future. . .”
Our prior economic history, now understood, need not be our future economic history. Now that we have identified the fundamental structural contradiction of capitalism as a system, then unless we wish to rid ourselves of capitalism and adopt some other such economic system, we have little choice but to do what is necessary to contradict the contradiction. Our failure to weaken or end the harsh historical assessment of r>g will ultimately not only be a threat to democratic societies and the values of social justice upon which they are based, but capitalism itself.
In view of the gross current inequalities now evident – and building – it is time to put aside our petty political grievances and ideologies and (as in war) unite to save the system we now have by altering it to avoid the historical ravages of r>g and to bring equilibrium to how we share our economy’s fruits. Social cohesion, our democracy, social justice and even capitalism as a system demand no less. GERALD E